Abstract
A high and persistent level of unemployment along with the elevated costs of servicing debt are among the major challenges facing the South African government today. To this end, this study examines the role that sovereign credit risk and economic policy uncertainty respectively have on these two major challenges. We make use of a vector error correction and Markov-chain model to quantify these impacts under the guidance of pre-existing long-run cointegrating relationships, as well as the transitory assumption of interest rates across the evolution of the business cycle. Controlling for other salient macroeconomic features, our empirical findings point towards the existence of a symmetrical response of unemployment rates to changes in the credit risk level. Moreover, elevated forms of policy uncertainty are found to have adverse effects on debt servicing costs, where the impact is seen to be less pronounced during periods of slowing economic activity. The policy implication is that elevated levels of policy uncertainty reduce access to debt capital markets, as illustrated by increasing debt servicing costs, which consequently lessen government’s ability to raise funding and absorb an idling labour force.
M.Com. (Economics)